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Monday, October 05, 2009

Chris Anderson's address to the Grow Smart Business Conference

Chris Anderson gave the keynote address, characterizing our time as the golden age of small business. He considers that the Internet has so changed the distribution system, that niche markets have a chance to develop in a way that was not previously possible. By way of example he talked about watching Gilligan’s Island as a youngster. The show was such a huge hit that it was difficult not to believe that this is what Americans really wanted to watch. But as Anderson pointed out, this was the twentieth century’s confusion with supply and demand. Broadcast TV’s distribution system limits choice. The Internet shows that we are more diverse.

Anderson pointed out that the Internet has infinite shelf pace. Everything is out there and small businesses have the opportunity to appeal to long tail niche audiences. Consumers are not satisfied with what is on the shelf at Walmart, they want more choices. Markets are global and your customer can be anywhere.

He said that most of us live in both the head and the tail. Appealing to niche audiences can make you more profitable. Anderson observed that the Italian economy has excelled in producing small boutique companies with global impact.

He said that companies exist to minimize transaction costs; they aggregate people, supplies, and distribution. He called the twentieth century the era of big companies. The Internet has lowered transaction costs.

Here, Anderson began to talk about his experience as an entrepreneur. He pointed out that the Internet offers us the opportunity to find the smartest people in the world. He offered his opinion that the passionate amateur was more valuable than the bored professional.

While working on his robotics company Anderson searched the Internet to discoverer everyone who was writing about robotics. He discovered that the ideal candidate for his company turned out to be a nineteen year old high school drop out, describing the young man’s expertise as a Google Ph.D.. He said this illustrated the “meritocracy of the Internet.”

Anderson allowed that big companies do some things magnificently. He said that small companies can move quickly; but have trouble scaling up.The moment you go on the Internet, you are a global company. With Paypal you can accept business from anywhere, you can, as it were, box above your weight.

He said that the Web is a good place to do business with suppliers. Three guys with laptops can be a hardware company. He offered the sad tale of the man who invented intermittent windshield wipers as an example. He was in the middle of building his factory when he discovered that the Auto companies had stolen his idea from him. Nowadays you would simply use the Internet to locate a manufacturer and get your order for wipers before risking your capital.

At this point Anderson began to discuss the evolution of the free economy. He told the story of Jello, how the manufacturer had given away free cook books filled with recipes based on Jello and then took product to the local store and persuaded the local store owner to stock some Jello, based on the demand the cook books were sure to generate.

Anderson said that the “power of free” allows consumers to experience products for free. The minority pays for majority. Google takes profits from one product (advertising) to subsidize its free products.

He said that freemium is the inversion of old free sample give away. The freemium model gives out 90% of the product and charges for 10%. Freemium sells itself; the consumer experiences the product before they pay and is sure they want it. The challenge is to properly define the free/paid divide.

Microsoft enterprise software is free to small business and paid to big business. Clearly, the idea is that as the small business grows to a large business it will pay for Microsoft because it likes the product.

Microsoft got the idea from Chinese pirates. Microsoft realized that in a developing country like China, if software pirates were going to steal software, it is better that they steal your software. The music industry failed to understand this, and lost the opportunity to control their industry. The video game industry is moving to the freemium model, and here Anderson described his son's fascination with the Club Penguin. Anderson suggested that the freemium model could work well for health care IT. We could have information driven health care, only going to doctors for the big things.